Speaking at the Resolution Foundation, committee member Michael Saunders said: “The precise path of future monetary policy is, of course, inherently uncertain, because it will depend on future economic developments that cannot yet be foreseen.
“But I note that the BoE Market Participants survey and the Treasury’s survey of external forecasters both suggest that Bank Rate will rise to around two per cent in the next year.”
He continued to say it was “not implausible or unlikely” that the base rate would reach two per cent or higher next year as the MPC attempts to bring inflation in line with the two per cent target.
He said the MPC faced the dilemma of doing “too much too soon” with monetary policy tightening or “too little too late”.
Saunders said the cost of acting too slowly “would be relatively high at present”.
He added: “With excess demand and elevated inflation, ‘too little, too late’ would increase the likelihood that recent trends in underlying pay growth, longer-term inflation expectations and firms’ pricing strategies become more firmly embedded. Such an outcome would increase the costs of returning inflation to target in coming years.
“Conversely, if the committee tightens ‘too much, too soon’ and then finds the economy and inflation pressures are much weaker than expected, the policy outlook could adjust – if needed – and inflation expectations would probably be better anchored than now.”
He said his preference was to “tighten relatively quickly”, as evidenced by his voting record at recent MPC meetings.
“But, rather than focus on a precise forecast for Bank Rate over the next year, the key point is that the tightening cycle may – in my view – still have some way to go,” he added.
Saunders’ speech focused on monetary policy in the past, present and future to mark the upcoming end of his six-year term as an MPC member.
